Indirect cost allocations and the incentive to report high program service expenditures in Form 990: an examination of donors' perceptions.

Journal of Academy of Business and Economics, February, 2003 by Flynn, R. Steven

ABSTRACT

The Internet presence of Forms 990 has provided nonprofits with increased incentives to report high program service expenditures. Organizations can artificially inflate these expenditures by allocating large amounts of indirect costs to program services. An experiment investigating donors' perceptions regarding program services and indirect cost allocations finds that nonprofits' attempts to mislead donors through cost allocations may succeed, even when signs of potentially manipulative allocations appear on functional expense statements. Donors possessing financial analysis skills may, however, detect these attempts, suggesting that web sites may need to emphasize a careful examination of the expense composition of program services.

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